Bob Tippee

Despite rapid growth, US capacity to produce fuel ethanol from grain faces a crunch this year.

The Energy Information Administration last month warned of gasoline price surges as refiners replace methyl tertiary butyl ether with ethanol.

Capacity for the latter is surging thanks to the renewable-fuel mandate in the Energy Policy Act of 2005. The Renewable Fuels Association says 14 ethanol "refineries" came on stream last year in the US, bringing the total to 95. Production jumped by 17% to 4 billion gal.

At the end of 2005, RFA says, 29 ethanol refineries and 9 expansions were under construction with combined capacity of more than 1.5 billion gal/year.

But ethanol capacity isn't coming on line fast enough to counter this year's rapid removal of MTBE, which refiners want to have out of the system by the start of the driving season.

The reason: Congress last year rejected limited liability protection for makers and sellers of MTBE, which has appeared in water supplies. Facing big legal jeopardy, refiners are shedding MTBE fast.

EIA sees problems this year because of volume losses from the replacement of MTBE with ethanol, limits on ethanol capacity, and difficulties getting ethanol storage, blending, and transport systems in place.

Supplemental ethanol supplies are available in trade. But most imported ethanol comes with a 54¢/gal tariff atop a normal duty based on value. Domestically produced grain ethanol blended into gasoline receives a 51¢/gal tax credit.

Ethanol supporters say the tariff keeps US taxpayers from providing an incentive twice for their product. With state incentives adding to the federal tax credit plus the new volumetric mandate, these things do to add up.

So what's to be done about consumer gasoline prices this year if EIA's fears come true?

A ready fix is to lift the tariff on ethanol imports. Then, whether or not redundant incentives are the problem ethanol supporters say they are, the next thing to go should be the tax credit. With wholesale gasoline prices where they are, ethanol producers don't need it.

So far, Congress hasn't scheduled any hearings on these ideas.

(Online Mar. 3, 2006; author's e-mail: bobt@ogjonline.com)

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